How to Reduce MAGI: What Works (and What Does Not) for High-Income Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on September 30, 2026.

To reduce MAGI (modified adjusted gross income), you have to lower the income that reaches your adjusted gross income line in the first place: pre-tax 401(k) deferrals, a family HSA, a dependent care FSA, pre-tax commuter and health premiums, deferred compensation, and capital losses. Deductions you take after AGI, such as mortgage interest, charitable gifts, state taxes and the standard deduction, do not reduce MAGI at all. Roth 401(k), backdoor Roth and mega backdoor Roth contributions do not reduce it either.

For a two-income household earning $600,000 to $1.2 million, the harder question is whether reducing MAGI changes anything besides your marginal rate. Most MAGI thresholds sit far below your income. One of them, the 2026 SALT cap phase-down, sits right in the middle of it.

What MAGI is, and why there is more than one

MAGI is not a line on your return. Each tax rule that uses it starts from AGI (Form 1040, line 11a on the 2025 form; line 11 in earlier years) and adds back a short list of items. For the rules that matter to W-2 families, the add-backs are rare ones, such as excluded foreign earned income. For the Net Investment Income Tax, MAGI is AGI plus the foreign earned income exclusion. The Roth IRA rules also ignore income from a Roth conversion. So for most families in this income range, MAGI is AGI, and the practical goal is to lower AGI. See where MAGI starts on Form 1040 for the line-by-line view.

What reduces MAGI and what does not

Limits are from IRS Notice 2025-67, Rev. Proc. 2025-19 and Rev. Proc. 2025-32. The dependent care increase from $5,000 to $7,500 comes from P.L. 119-21. The capital loss rule is in IRS Topic 409.

Does mortgage interest reduce MAGI?

No. Mortgage interest is an itemized deduction on Schedule A. It lowers taxable income, but only after AGI is set, so it has no effect on MAGI or on any threshold that uses MAGI. The same is true of charitable gifts and the standard deduction; our note on the standard deduction and MAGI walks through why.

Do HSA contributions reduce MAGI?

Yes, for federal purposes. Contributions through payroll are excluded from wages, and contributions you make directly are deducted above the line. For 2026 the family limit is $8,750 with a qualifying high-deductible plan. California does not conform: the FTB Schedule CA instructions add back both your deduction and the payroll amount in W-2 box 12 code W, and HSA earnings are taxable in California each year. Whether an HDHP fits your family is a separate question, covered in is a high-deductible HSA plan worth it.

Which MAGI thresholds matter at $600,000 to $1.2 million

• Roth IRA: the 2026 MFJ phase-out is $242,000 to $252,000. You are above it either way, which is why the backdoor Roth exists. Lowering MAGI will not get you back under it.
• Child Tax Credit: $2,200 per child for 2026, reduced by $50 per $1,000 of MAGI over $400,000 (MFJ). With two children it reaches zero at $488,000. Most families in this range get no credit.
• Net Investment Income Tax: 3.8% on the lesser of your investment income or MAGI over $250,000 (MFJ). When MAGI is far above $250,000, the lesser number is your investment income. Lowering wages does not reduce this tax. Harvesting losses or not selling does.
• SALT cap phase-down: for 2026 the cap is $40,400, reduced by 30% of MAGI over $505,000 (MFJ), never below $10,000. It hits the floor at a MAGI of about $606,333. This is the one threshold where cutting MAGI buys something extra, and only in that band.

Sources: Notice 2025-67, Schedule 8812, IRS NIIT page, P.L. 119-21 §70120.

Worked example: a San Jose household at $655,000

Assumptions (illustrative, 2026, married filing jointly): two W-2 earners at a large tech employer with combined salary and bonus of $460,000 and $180,000 of RSU vests, two children ages 4 and 7, and $15,000 of dividends and interest in a taxable account. Both currently put their 401(k) deferrals into the Roth option, and neither uses an HSA or dependent care FSA. AGI and MAGI are $655,000. They itemize: $10,000 SALT (the floor) and $33,000 of mortgage interest, $43,000 in total. We leave charitable gifts out of the example, because from 2026 they are deductible only above 0.5% of the donor’s contribution base, generally AGI (P.L. 119-21 §70425).

1. Switch both 401(k) deferrals to pre-tax: $49,000 (2 x $24,500).
2. Move to an HDHP and fund the family HSA through payroll: $8,750.
3. Enroll in the dependent care FSA for preschool and after-school care: $7,500.
4. Harvest losses in the taxable account so net losses exceed gains by $3,000.

MAGI falls by $68,250 to $586,750. That lands inside the SALT band, so the cap rises to $40,400 minus 30% of $81,750, or $15,875. Itemized deductions rise from $43,000 to $48,875.

Federal taxable income drops by $74,125, all in the 35% bracket ($512,450 to $768,700 for 2026), so federal tax falls by about $25,940. About $2,060 of that comes from the SALT phase-down, a benefit a household at $700,000 would not get from the same moves. On the California side (2025 schedules; 2026 is not yet published), the HSA is not deductible, so assume only the 401(k), $5,000 of the dependent care FSA and the $3,000 loss count: $57,000 at 9.3% is about $5,300. Total first-year saving: roughly $31,000.

Two honest caveats. The 401(k) switch defers tax rather than removing it; the $49,000 is taxed when withdrawn, so the trade is today’s 35% plus 9.3% against your rate in retirement. And the payroll moves do not change the NIIT or the Child Tax Credit. MAGI remains far above $250,000, so the 3.8% is still figured on the family’s investment income, which only the loss harvesting, not the payroll elections, can reduce.

At $1.1 million, the math is simpler

A household with $1.1 million of income and taxable income above $1 million is past every threshold above, so each dollar of MAGI you remove is worth only your marginal rate: 37% federal (above $768,700 for 2026) plus 11.3% California and the 1% Behavioral Health Services Tax on income over $1 million, close to 49% in total. Two pre-tax 401(k) deferrals ($49,000) are worth about $24,000 a year. At this level the larger lever is usually not realizing income at all: gifting long-held appreciated shares to a donor-advised fund instead of selling them keeps the gain out of AGI entirely (see IRS Pub 526 for the rules on appreciated property).

California and Washington change the answer

California taxes wages, RSUs and capital gains as ordinary income, with no lower rate for long-term gains (FTB), and it generally does not follow the 2025 federal law changes. It ignores the higher SALT cap, taxes HSA contributions, and may not follow the dependent care increase above $5,000; ask your payroll team how they report it. SDI of 1.3% for 2026 applies to all wages with no cap (EDD), and pre-tax 401(k) deferrals do not reduce it (EDD DE 231TP).

Washington has no income tax on wages in 2026, so reducing MAGI there is a federal exercise. Two exceptions: the 7% capital gains tax (9.9% on taxable gains over $1 million) makes loss harvesting worth more, above the 2025 standard deduction of $278,000, and a new 9.9% income tax on AGI over $1 million starts January 1, 2028 (WA DOR). Washington families near $1 million should start tracking AGI now, before DOR publishes the full definitions.

Common mistakes we see at this income level

• Choosing Roth 401(k) by default in a 35% or 37% year without comparing it to pre-tax.
• Assuming the mega backdoor Roth lowers taxable income. It does not; it is after-tax money. We compare it to a brokerage account in mega backdoor Roth vs brokerage.
• Paying down the mortgage or giving more to charity to “lower MAGI.” Both are after-AGI items.
• Donating RSU shares that just vested. Their basis equals the value at vest, so there is little gain to avoid; long-held, appreciated lots do far more.
• Missing open enrollment. Dependent care FSA and deferred compensation elections, and the HDHP enrollment an HSA requires, are generally set once a year.

What to write down for your kids

Every year you choose between tax now and tax later, between selling and giving, and those choices will not be obvious from a statement. A one-page note on why you went pre-tax, what the dependent care FSA paid for, and which shares you gave away and why is exactly the reasoning children never see. Conversations fade. Documentation compounds. That note belongs in your FamilyKnowledge® Library next to the account list.

Next step

Before your next open enrollment, pull last year’s Form 1040 and read line 11a (AGI). If it falls in the 2026 SALT band of $505,000 to $606,333 and you itemize, each dollar you move pre-tax is worth your bracket plus 30 cents of extra SALT deduction. The cap and the $505,000 threshold rise 1% a year through 2029. If you want someone to model the elections for your household, our tax management and retirement and employee benefits teams cover this in the Tax & Wealth Assessment.

This article is general education, not individual tax advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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